California addressing larger budget gap than what Gov. Gavin Newsom’s plan estimates, report says

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The California agency that advises lawmakers on fiscal matters estimated Friday that Gov. Gavin Newsom’s administration is addressing a larger budget gap than what it reported in its recently released spending plan.

The Legislative Analyst’s Office projects the new budget proposal contends with a $55 billion shortfall for the upcoming fiscal year, which beings July 1. Newsom’s plan said it was overcoming a $44.9 billion gulf.

Still, the agency said the variation does “not reflect substantive differences” in their views of the state’s future. The report assumes higher spending on schools and community colleges than the administration’s proposal, leading to much of the difference.

Overall, the analysis said the governor’s new plan “improves the fiscal health of the state in a number of ways.”

The new report is significant because it provides lawmakers with another view to consider just four weeks before they are supposed to pass a balanced budget for the new year. In a separate analysis, the agency predicts the state will bring in less revenue in the future than the administration projects. Taken together, the estimates could influence how much legislators want to cut back to address the state’s shortfall.

“Challenging decisions will be required in the coming weeks to land on a final budget agreement that reflects the principles that both we and the LAO recognize,” H.D. Palmer, a Department of Finance spokesman, said in an emailed statement. “The Governor is ready to work with the Legislature to achieve this.”

Spokespeople for Democratic leaders in both the Assembly and Senate did not immediately respond to requests for comment.

Republican Sen. Roger Niello, the vice chair of the Senate Budget and Fiscal Review Committee, said Friday’s report provided clarity but did not alleviate all of his concerns with the administration’s budget plan.

Niello, whose district includes Fair Oaks, Roseville and Yuba City, did not like that the governor called the state’s upcoming shortfall roughly $27.6 billion when presenting his proposal, because that came only after the Legislature agreed to more than $17 billion in savings.

“I understand it better,” he said, “but I am still very critical of the administration’s approach to how they’re telling the story.”

It is common for the agency and administration to have differing views of the state’s financial situation. But those contrasts have attracted a lot of attention in recent months.

In December, the analyst’s office warned the state could see a $68 billion shortfall. How news outlets reported that prediction frustrated Newsom, who urged reporters not to treat it as “gospel” and said the administration’s figure was “the number” to use.

When the governor in January unveiled the state’s budget plan for the upcoming fiscal year, it predicted the state would face an almost $37.9 billion gap. Newsom, at the time, said the administration was “just a little more optimistic than all the naysayers” about state’s financial future.

A follow-up estimate from the analyst’s office said the shortfall could be as high as $73 billion, in large part because of a severe decline in revenue.

Predicting tax revenue is a difficult task in any state, but California’s receipts are especially difficult to forecast. The highest earning residents pay a major share of personal income taxes, which is the state’s largest source of revenue. Ups and downs in the stock market can drastically affect how much California brings in from year to year.

Making projections was made even more challenging after the Internal Revenue Service last year postponed the tax deadline more than six months for most Californians due to winter storms across the state. Newsom followed by extending the state’s deadline to align with the federal government.

For all these reasons, it is not unusual that economists would come up with different predictions.

That said, recent cautiousness from the analyst’s office has proved to be more accurate. And the administration recently pulled back some of its optimism.

The initial and revised plans the governor unveiled this year covers three fiscal years, from 2022 to 2025. The revised proposal Newsom released May 10 said the state’s major revenue sources — personal income, corporate and sales and use tax — were roughly $10.5 billion lower than what the administration had initially projected would come in during that time.

The analyst’s office report said it is forecasting lower revenues in the future than the administration’s new plan. It cautioned the Legislature that using the governor’s estimates could mean the state faces additional shortfalls next year. But using the administration’s more optimistic predictions could prevent budget cuts that end up being larger than are needed.

Newsom has vowed to cut, delay and shift spending to balance future budgets, leading to unhappy responses from interest groups.

In Friday’s report, the agency supported the governor’s approach to pull back one-time and temporary spending and also reduce the use of state reserves to fill in the gap.